Excerpt: Energy Future Holdings: Valuation Issues Hover Over Bankruptcy Proceedings

  • What is EFH – and more specifically its subsidiaries TXU Energy, Luminant and Oncor – worth? That’s the $42 billion question.
  • At issue are EFH’s three distinct business units: (i) Luminant which is the merchant power unit; (ii) TXU Energy which is the retail electric unit, and (iii) Oncor’s power delivery business. Luminant and TXU Energy are unregulated, while Oncor is regulated.
  • A few of the critical existing and potentially emerging valuation issues in EFH’s Chapter 11 process include things like (i) premises of value, (ii) regulatory issues as they pertain to pricing and rate setting, (iii) consolidated vs. non-consolidated restructuring scenarios and (iv) development of projections and cash flows.
  • The other key standard is reorganization value, which can be defined as the enterprise value of the reorganized debtor. This more futuristic premise takes into account the effects of the bankruptcy process and its benefits to the value of the debtor(s). The difficulty of this can be in its proper application and timing.
  • One of the negotiated items pre-bankruptcy was whether or not to consider a “consolidated” bankruptcy for EFH, meaning including Oncor in the plan.
  • This is an important consideration. Oncor is not a debtor in the Chapter 11 case, but its value is a relevant component to the restructuring. TXU is Oncor’s largest customer, and it is regulated by the Public Utility Commission of Texas (“PUC”). Due to its regulated status, Oncor is restricted from making distributions to EFH under certain conditions.
  • When private equity investors KKR, TPG and Goldman Sachs bought EFH in 2007 for more than $8 billion in equity, it was widely seen as a bullish take on natural gas prices. Back then, investor projections anticipated rising Henry Hub prices. They were wrong.

Source: Mercer Capital